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Types of Forex brokers - ECN, STP, MM
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Types of Forex brokers - ECN, STP, MM

created Paweł MosionekJanuary 17 2020

Types of brokers Forex - how many are there and what does it mean for us? Brokers are realtors who enable us to make transactions. Without them, the retail Forex market would have no reason to exist. However, there are various market models based on which brokers operate and implement our positions, which translates into the quality of trade and the degree to which we have access to the currency market. Each model has its strengths and weaknesses, which can affect our comfort when making a transaction and can significantly translate into the results we achieve.


LIST OF FOREX BROKERS


Broker MM - Market Maker

Until recently, the most popular market model that is slowly starting to die out. Simply put, the MM broker simulates a real market (displays prices through the dealing desk, which may have some deviation from the real market) and is the other party to transactions concluded by clients. This means that the investor is trading with the broker and not on the real exchange where the broker secures (or at least should) the trades, which protects him from risk. This has consequences and can lead to a conflict of interest between the broker and the client. If the transaction is not secured, the profit made by the investor is the broker's loss and vice versa. The broker's loss in such a situation increases the income of the brokerage house. It is not difficult to guess that this may lead to some manipulations on the part of the broker who, in fact, only simulates the market. However, the simulation itself also has its advantages. For example, fixed transaction costs known in advance or no slippage in the execution of orders. There is no significant market liquidity here, which may affect the expansion of spreads or the execution of the order at a different price than indicated by us.

broker mm

Does every market maker have to be bad? Not necessarily. This model has its clear pros and often, e.g. in extreme situations, it may turn out to be a godsend for traders (in the absence of liquidity on the market) or it may be more affordable for beginners in investing.

Advantages:

    • low minimum deposit,
    • micro and nano-flights,
    • there are generally no liquidity problems.

Disadvantages:

    • higher fees
    • possible requotes,
    • possible conflict of interest.

ECN Broker - Electronic Communication Network

The most advanced and conflict-free market model on the Forex market. The broker here is only a trade broker who charges a commission for each completed transaction. It brings together liquidity providers (liquidity providers) with which he associates the orders of his clients. The market is not simulated, prices usually come from the largest global banks (Deutsche Bank, Goldman Sachs, UBS, JP Morgan and others).

Selected Liquidity Providers

XOpen HUB Dukascopy Bank (SWFX) Swissquote Sucden Financial IS Prime
LMAX Exchange IG Group Total Price Nomura ADS Securities

 

The customer always receives the most favorable price possible, which is out of other competitors available at the same time. Due to the very large number of scrolling orders, you get the impression that the rates on ECN platforms change faster and are more accurate. And it really is. Huge liquidity translates into fast execution of orders and very low spreads, especially on major currency pairs, which should be added to the commission, but ultimately, as a rule, it turns out to be the cheapest model when concluding transactions on the Forex market.


Be sure to read: How to calculate commission from Forex broker?


Due to the fact that the ECN broker is only an intermediary, there is no conflict of interest between him and the client. There is no price manipulation or other intentional play that could upset the investor's life.

types of forex brokers broker ecn

However, not all that glitters is gold - ECN also has its drawbacks. Due to the fact that the broker is not a party to the transaction and acts as an intermediary, he passes orders on and must find a second investor who will conclude a transaction opposite to ours. With dynamic price changes (e.g. after the publication of macro data) or limited market liquidity (night hours, public holidays), the so-called price slippages, i.e. execution of orders at prices other than those indicated by the investor. This is due to the problem of matching orders among themselves in such sensitive situations, which the broker has little influence on. The whole phenomenon results from the specificity of the operation of market mechanisms.

Advantages:

    • very low spreads,
    • insight into the depth of the market,
    • the ability to place your own offer in the order book,
    • no conflict of interest.

Disadvantages:

    • possible price slips,
    • higher capital requirements,
    • possible "Last look".

STP Broker - Straight Trough Processing 

Intermediate model between MM and ECN, though closer to the latter. His remuneration is part of the spread or an additional commission, depending on the company's policy. The broker, entering into cooperation with certain banks that are its liquidity providers, forwards client orders to them, which are then carried out. It is a less complicated form of ECN, where in one place there is not a whole group of suppliers whose offers compete with each other and the best is selected. This may involve greater or slippage, depending on the technology used and the size of the chosen liquidity provider.

broker stp

When it comes to conflicts of interest, the investor should not be too worried either. The broker only transfers orders, however, there are known cases where the broker kept orders of his client, extending the lead time, while securing them immediately on the market, so he could earn on differences in price. Therefore, the speed of order processing is extremely important in the STP model.

Advantages:

    • no conflict of interest,
    • low transaction costs,
    • affordable capital requirements.

Disadvantages:

    • no possibility to place an offer in the order book,
    • possible price slips.

Types of Forex Brokers - Which is the Best?

There are three main types of Forex brokers but there can be infinitely many expectations and strategies of traders. Each type has its strengths and weaknesses. Nor can you generalize, because there are both reliable Market Maker brokers and average ECN brokers. However, when it comes to conflict-freeness, ECN technology is definitely the leader here. A good broker of this type, which brings together many liquidity providers. In the long run, it should also be the most advantageous in terms of price (small scale of possible slippage in the execution of orders). However, STPs can compete with them in this field, as well as in the speed of concluding transactions. However, MM broker, which offers a simulated market, can work well at the beginning of the currency trader's career. In this model, we will know our transaction costs in advance, and simplified market mechanisms will make learning trade much easier.

Types of Forex Brokers - Summary of Features

Market Maker ECN STP
spread Determined by the broker market variable market variable
Broker fees usually just spread commission commission
Broker as a transaction page YES NEVER NEVER
Rekwotowania depends on the broker NEVER NEVER
Price slips depends on the broker YES YES
Insight into the depth of the market NEVER YES depends on the broker
Place Bid / Offer orders NEVER YES NEVER
Distance limits for pending orders depends on the broker NEVER NEVER

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About the Author
Paweł Mosionek
An active trader on the Forex market since 2006. Editor of the Forex Nawigator portal and editor-in-chief and co-creator of the ForexClub.pl website. Speaker at the "Focus on Forex" conference at the Warsaw School of Economics, "NetVision" at the Gdańsk University of Technology and "Financial Intelligence" at the University of Gdańsk. Twice winner of "Junior Trader" - investment game for students organized by DM XTB. Addicted to travel, motorbikes and parachuting.